TUPE & share incentive schemes

Where employees transfer under TUPE, their share incentive arrangements may require particular attention. Replacing existing schemes can be difficult where the old and new employers have different share structures and valuations. We explore the key issues and possible solutions.

We look at:

• The impact of share incentives when there is a TUPE transfer.
• Whether compensation may be payable.

Background

TUPE may apply to business sales, outsourcing agreements, collaborations and internal reorganisations. Employees may hold shares or options in the transferring business, including EMI options, CSOP options, unapproved options and growth shares. These arrangements can be difficult to replicate in the acquiring business.

Impact for share incentives under TUPE

A business acquisition may take the form of:

• A share sale, where employees generally remain employed by the same employer; or
• An asset sale, where employees may transfer to a new employer under TUPE.

If the new employer cannot or does not maintain an existing share plan, potential liability for compensation will depend on the circumstances.

Share sale

Share option plans may allow employees to exercise their options on a sale or provide for options to be exchanged for options in the acquiring company. The terms of the plan and the relevant transaction documents will determine the available options.

Where options are exchanged, the parties must consider how many replacement options should be granted. Certain tax-advantaged arrangements may allow qualifying periods to be preserved, subject to the applicable rules.

Asset sale

TUPE may require the new employer to provide replacement benefits where employees’ existing share incentives cannot continue. Whether a replacement arrangement is sufficiently equivalent depends on the particular rights and circumstances.

Failure to provide appropriate replacement benefits may lead to Employment Tribunal claims. Employers should therefore review the existing arrangements and consider whether a replacement scheme or compensation may be necessary.

Share incentives and TUPE

Employers should carefully consider:

• The terms of the existing plan.
• The relative values of the shares or options.
• Whether there is a market for the shares held by employees.

Is compensation payable

The position depends on the transaction and the rights affected.

Tax-advantaged status

Losing tax-advantaged status may cause an employee financial loss. However, the consequences depend on the relevant scheme rules and tax legislation. Any disclaimer of liability should be reviewed carefully rather than assumed to be enforceable.

TUPE and compensation

Where a transfer results in the loss of share plan rights, an employee may be entitled to compensation, depending on the circumstances. The assessment may consider the value of the lost rights and any replacement benefits provided.

Share options

If the market value of shares is below the option exercise price, the options may have no immediate economic value. However, the potential for compensation will depend on the plan terms and the circumstances of the transfer.

Shares

Employees who have purchased shares may suffer a loss in value following a transfer or restructuring. A fall in value does not automatically create a right to compensation; the position depends on the rights affected and the circumstances.

Challenges to the award of compensation following loss under a TUPE transfer

Claims involving lost share incentives can be complex. Relevant factors include:

1. Whether the plan contains provisions limiting liability.
2. The nature of the employee’s rights and the available remedies.
3. Whether the plan expressly addresses what happens on a TUPE transfer.

Disputes can arise over the valuation of shares in private companies. Clear valuation provisions in the articles of association, shareholders’ agreement or share plan can help reduce uncertainty and avoid disputes.